Posted on 10/24/2008 2:04:09 PM PDT by RetiredArmy
House Democrats Contemplate Abolishing 401(k) Tax Breaks
Powerful House Democrats are eyeing proposals to overhaul the nation’s $3 trillion 401(k) system, including the elimination of most of the $80 billion in annual tax breaks that 401(k) investors receive.
House Education and Labor Committee Chairman George Miller, D-California, and Rep. Jim McDermott, D-HAMAS (Washington), chairman of the House Ways and Means Committee’s Subcommittee on Income Security and Family Support, are looking at redirecting those tax breaks to a new system of guaranteed retirement accounts to which all workers would be obliged to contribute.
A plan by Teresa Ghilarducci, professor of economic-policy analysis at the New School for Social Research in New York, contains elements that are being considered. She testified last week before Miller’s Education and Labor Committee on her proposal.
At that hearing, the director of the Congressional Budget Office, Peter Orszag, testified that some $2 trillion in retirement savings has been lost over the past 15 months.
Under Ghilarducci’s plan, all workers would receive a $600 annual inflation-adjusted subsidy from the U.S. government but would be required to invest 5 percent of their pay into a guaranteed retirement account administered by the Social Security Administration. The money in turn would be invested in special government bonds that would pay 3 percent a year, adjusted for inflation.
The current system of providing tax breaks on 401(k) contributions and earnings would be eliminated.
“I want to stop the federal subsidy of 401(k)s,” Ghilarducci said in an interview. “401(k)s can continue to exist, but they won’t have the benefit of the subsidy of the tax break.”
Under the current 401(k) system, investors are charged relatively high retail fees, Ghilarducci said.
“I want to spend our nation’s dollar for retirement security better. Everybody would now be covered” if the plan were adopted, Ghilarducci said.
She has been in contact with Miller and McDermott about her plan, and they are interested in pursuing it, she said.
“This [plan] certainly is intriguing,” said Mike DeCesare, press secretary for McDermott.
“That is part of the discussion,” he said.
While Miller stopped short of calling for Ghilarducci’s plan at the hearing last week, he was clearly against continuing tax breaks as they currently exist.
Savings rate
“The savings rate isn’t going up for the investment of $80 billion,” he said. “We have to start to think about ... whether or not we want to continue to invest that $80 billion for a policy that’s not generating what we now say it should.”
“From where I sit that’s just crazy,” said John Belluardo, president of Stewardship Financial Services Inc. in Tarrytown, New York. “A lot of people contribute to their 401(k)s because of the match of the employer,” he said. Belluardo’s firm does not manage assets directly.
Higher-income employers provide matching funds to employee plans so that they can qualify for tax benefits for their own defined-contribution plans, he said.
“If the tax deferral goes away, the employers have no reason to do the matches, which primarily help people in the lower income brackets,” Belluardo said.
“This is a battle between liberalism and conservatism,” said Christopher Van Slyke, a partner in the La Jolla, California, advisory firm Trovena, which manages $400 million. “People are afraid because their accounts are seeing some volatility, so Democrats will seize on the opportunity to attack a program where investors control their own destiny,” he said.
The Profit Sharing/401(k) Council of America in Chicago, which represents employers that sponsor defined-contribution plans, is “staunchly committed to keeping the employee benefit system in America voluntary,” said Ed Ferrigno, vice president in the Washington office.
“Some of the tenor [of the hearing last week] that the entire system should be based on the activities of the markets in the last 90 days is not the way to judge the system,” he said.
No legislative proposals have been introduced and Congress is out of session until next year.
However, most political observers believe that Democrats are poised to gain seats in both the House and the Senate, so comments made by the mostly Democratic members who attended the hearing could be a harbinger of things to come.
Advice at issue
In addition to tax breaks for 401(k)s, the issue of allowing investment advisors to provide advice for 401(k) plans was also addressed at the hearing. Rep. Robert Andrews, D-New Jersey, was critical of Department of Labor proposals made in August that would allow advisors to give individual advice if the advice was generated using a computer model.
Andrews characterized the proposals as “loopholes” and said that investment advice should not be given by advisors who have a direct interest in the sale of financial products.
The Pension Protection Act of 2006 contains provisions making it easier for investment advisors to give individualized counseling to 401(k) holders.
“In retrospect that doesn’t seem like such a good idea to me,” Andrews said. “This is an issue I think we have to revisit. I frankly think that the compromise we struck in 2006 is not terribly workable or wise,” he said.
On Thursday, October 9, the Department of Labor hastily scheduled a public hearing on the issue in Washington for Tuesday, October 21.
The agency does not frequently hold public hearings on its proposals.
Filed by Sara Hansard of Investment News, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.
That’s just perfect! We have put in the max that we can for years and now they want this!!! This country is falling apart fast!
Here is just ONE example of how a veto proof Congress and a DemPres can dismantle the nation. They will discover soooo many more.
How about this one? You give all your IRA money to the Social Security System and they guarantee that you get back twice as much in Social Security payments unless you die first.
Nothing will be off the table with these turds in power. We’re not talking about an experiment in socialism, we’re talking about taking a direct route to 1970’s Russia. God help us.
Talk about misappropriation of the language. There is no federal subsidy of 401K’s. Only in Washington could a tax break be called a “subsidy.”
“This alone will cause the Demos to lose Congress in 2010 if implemented. Are they really this stupid? (Rhetorical)”
You’re assuming we’ll be allowed to really vote in 2010......
Spreadin’ the wealth.
Pay attention to what is stated here: everything that is not taxed is a government subsidy.
Everything you earn belongs to the Democrats first and they ALLOW you to keep whatever they say you deserve -- Whatever you deposit in your bank account is now a government subsidy.
You are officially owned by Democrats. Property rights and individual freedom are just obstacles in the way of "kind-hearted" Democrats.
Your labor is no longer private property.
These types of ideas are the very nuts-n-bolts of communism.
Coming soon to an American household near you?
“This alone will cause the Demos to lose Congress in 2010 if implemented. Are they really this stupid? (Rhetorical)”
You’re assuming we’ll be allowed to really vote in 2010......
Hey that’s great! So a stay at home like myself who has not worked in years due to raising five kids and not being recognized by the Ass*oles in Washington that we have a REAL job get totally shafted!
Heaven forbid something happens to spouse! I guess I better stock up on One A Day for men! Why the he*l isn’t McCain screaming about this?!!!!!
Not JUST no, but HELL NO!!!!
What do you bet, IRAs will be next?
Great. Hubby and I have contributed for twenty years to social security and I seriously doubt that we will ever see a dime of it. Now, we’re supposed to contribute to this and we’ll probably see 10 cents on the dollar because we have to bail out all of the irresponsible people who didn’t save!!!!!
Democrats are all about spreading poverty (except for themselves, of course).
It began a long time ago. This is merely feels being leaked to the public. How far, how fast. If we balk, they go slower. But make no mistake, we are heading toward socialism. Socialist America is the next civil war, not abortion.
Great. So we are FORCED to give for ANOTHER social-security-stlye Ponzi scheme.
I knew, I just KNEW that the 401k thing was a longterm scam. That’s why I never really bothered. It struck me that someday they’d come and steal it.
Gee...I wonder if the Congressional retirement benefits will be included too? After all, it’s the only fair thing to do.
I plan to sit on my fat butt and play SporeTM all day every day.
Voting. (chuckles)
How quaint.
Don't make them make that promise.
Because then they'd kill you.
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